The strategy we routinely follow for with this type of hedge is to purchase it while the market is in a sustained or irrational uptrend, buy the longest amount of time available, and wait for the usual correction, or volatility to hit the market.

In this case we waited for more than six months before seeing the position move positively, but as was seen with this recent downturn the result if often extreme.

This market action moved our losing position to a highly profitable one in very short period of time.  This is the primary reason we use the VIX vehicle for hedging our long portfolio.

Extreme moves can mean big profits very quickly even when the long portion of our portfolio doesn’t wind up moving down very much despite the volatility.

Coach BD

We sold:

50%  -  AUG 27.50 Calls for a credit of $1.65

50%  -  AUG 30 Calls for a credit of $1.25

This action anticipates that the VIX will retreat from these high levels between now and expiration.  If it retreats quickly we will roll the calls down to collect more premium and lock-in more profits.

Members view the current position in the Model Portfolio.

Coach BD

Immediately after the news of the Greece/EU deal was announced and the market began rallying back up, we entered:

SOLD -  50% Short 22.50 Calls for a $1.45 CREDIT

SOLD -  50% Short 25 Calls for a $1.10 CREDIT

If we get a rally on the heels of this news we will be able to take some ST profits on these short VIX calls and still maintain some good upside for our core VIX position ahead of expiration just 3 weeks from now.

We continue to believe we will see a significant spike in volatility our the next few months and as today’s volatility continued to correct downward, we still are watching a pattern of higher highs and higher lows since the recent lows on the VIX in April.

In the current market environment we would expect to see the VIX bounce off of the 16 level and head higher once again, finally clearing some of this overhead trend resistance from the 50 & 200-Day MA’s, following the now upward trending 20-Day MA.

We added:

50% increase in AUG -  20 Calls @ $3.00

This add-on reduces our overall cost basis on the position to $4.06

Coach BD

The VIX gapped lower to around 15 and we like adding VIX protection at these levels.

We added:

AUG 20 Calls @ $4.30

We anticipate a significant correction prior to AUG and our VIX calls could explode on any move in the VIX to 30 or higher, which has been common during corrections over the past couple of years.

Coach BD

SOLD -  Short MAY 35 Calls @ $1.60

SOLD -  Short MAY 40 Calls @ $1.10

These ST moves reduce our risk by >25% on our original position cost of ~$5.00 and generates some significant ST income on this position, while still maintaining excellent upside potential.

Coach BD

Even with some significant selling recently the VIX hasn’t spiked as we expected and we continue to believe that there will be a more volatility ahead.

We rolled our MAR 18 Calls out to the JUN 20 Calls for a debit of $1.00

This protects our downside risk for another 3 months.

Coach BD

This market has not had any significant correction or consolidation since last November and the volume has been fairly low and generally declining.  We will be watching all of our hedged long positions very carefully over the near-term and may bolster our VIX position in continued anticipation of a significant correction.

Coach BD

We have now collected a total of $4.46 in premium against our Long March VIX position and currently have an unlimited upside should the market become more volatile between now and March of 2011, which we expect it will.

We will consider additional ST premium sales as we approach DEC expiration, or if the market shows a significant increase in volatility.

Coach BD

ROLLED -  1  SHORT OCT 21 Call to SHORT NOV 25 Call for a $1.45 CREDIT

ROLLED -  1  SHORT OCT 22.50 Call to SHORT NOV 27.50 Call for a $1.25 CREDIT

Because of today’s sell-off, we were able to get good premium prices for further Out-of-The-Money (OTM) SHORT Calls so that if we do see any significant correction we have given our Long VIX Calls more room to run to the upside.